I’m suspicious about Dr Cullen’s claim that we are heading for a “technical recession“. I agree that we are heading towards a period of sub-trend growth. We might be heading towards a period where we have a consumption based recession (slow growth, consumption stalls, unemployment rises), which would be a big deal.

However, what Dr Cullen is saying is that we will have a technical recession. Now usually when someone puts the work technical infront of something they are trying to demean it. The saying “well that might be technically true” is usually a starting point for saying why something doesn’t matter.

However, in the case of a recession, the term technical recession is actually a big deal as it specifically implies that we will have two quarters of negative (seasonally adjusted) growth. Many people are happy to pull out the word recession (or lite-recession) when we have two quarters of small growth (say below an annualised rate of 1%) so as you can tell a technical recession is worse.

Most analysts have picked a lite-recession during the second half of 2008, however only one forecaster had the balls to pick a full blown ‘technical recession’ – BNZ. However, even they only just have a technical recession by December 2008, a small upward surprise (even 0.1%) would take that away.

As a result, Dr Cullen is either preparing us for the worst, his words were misrepresented by the media, or he used the term inappropriately. I’m going for some wild mix of all three.

I guess cutting gst might not be a bad policy to encourage consumption and help stave off a recession? But you’re right I think they will come up with some kind of complicated “rebate” policy rather than just cutting the tax rates or adjusting the brackets.

“I guess cutting gst might not be a bad policy to encourage consumption and help stave off a recession?”

Shouldn’t a flat cut in the tax rate do the same thing as a cut in the GST rate. After all, a cut in GST decreases all prices shifting your budget constraint right, a cut in taxes increases income shifting your budget constraint right. Of course all this stuff depends on where the incidence of tax falls etc.

It’ll be interesting to see what they cook up – at least its not like the US 😉